Petrol price paradox

Petrol price paradox

As the national peak body for fuel wholesalers and retailers in Australia, ACAPMA both monitors and responds to criticisms levelled at our industry in respect of petrol prices.

“A variety of Government bodies and economic groups have provided national commentary on petrol price movements for many years, given that these prices have historically provided a ‘lead indicator’ of national household and consumer sentiment”, said ACAPMA CEO Mark McKenzie.

“But you really must wonder whether fuel price remains a significant indicator of economic conditions given dramatic improvements in the fuel efficiency of cars and the substantial – and unmentioned – increases in other capital city motoring costs such as road tolls”, continued Mark.

The relevance of continued national debate is even more questionable when you consider some of the recent media about petrol prices over the past month.

Just four weeks ago, CommSec released a report stating that average household expenditure on fuel now accounts for just 3.5% (or $50) of weekly household expenditure during 2105/16 – the lowest in real terms for more than 30 years.

Conversely, early last week the big news about petrol prices was that the oil price had increased by almost 40% since the end of June 2017 and, as a result, petrol prices in Australia would soon “surge to 2 year highs”.

Then, late last week, Fairfax media ran a story about how petrol prices would increase in the lead-up to Christmas – apparently implying that fuel retailers were somehow responsible for the rise.

On Monday of this week, the ACCC released its Quarterly Petrol Price Monitoring Publication for the September 2017 Quarter (see: https://www.accc.gov.au/system/files/Report%20on%20the%20Australian%20petroleum%20market%E2%80%94September%20quarter%202017.pdf). The ACCC noted that average capital city petrol prices had fallen by about 2.7cpl over the quarter – on top of a fall of 3.9cpl in the prior quarter – and that fuel retailer margins appeared to have declined slightly over the same period.

“Record low price”, “high price”, “low price” – are you dizzy yet?

And all this commentary in just one four-week period.

It goes without saying that petrol industry ‘bashing’ is a national pastime in Australia – and nothing will change that anytime soon.

“The fuel industry is a soft political target and, as one Federal Politician told me soon after I assumed the reigns at ACAPMA, no politician ever lost any votes by attacking the fuel industry in Australia”, said Mark

Many seem to think that the problems in our industry are due to a small number of big companies operating in an oligopolistic market and secretly conspiring on prices.

But the fact is that that much of the industry (more than 65%) consists of small businesses – many operating as franchisees of larger known brands – who make independent decisions on the petrol prices they charge at their sites.

These small businesses are working hard to remain competitive and, together with the company owned operations, employ around 45,000 Australians.

Our industry is also a significant tax collector for the Australian Government with around 53cpl of every litre of petrol sold being passed directly to the Australian government for the funding of hospitals, schools and roads.

“An interesting point to note here is that Federal Tax collections (excise and GST) do not change markedly with movements in fuel price – a fact often lost on those who criticise our industry when fuel prices do not go down as fast as the oil price”, said Mark.

“Under the current cost structures and exchange rates, a 10% change in oil prices means a likely 1% change in average petrol prices at the pump”, continued Mark.

This means that the almost 40% increase in world oil prices (since the end of June of this year) will likely result in a 4% increase in average petrol prices in the December Quarter – or around 5cpl.

“For an average 40 litre fill, this means a net weekly increase of $2.00 – or around half the cost of a single, good cup of coffee”, said Mark

Such a cost increase is minimal – should it occur – particularly when compared with increases in other household essentials like electricity prices, telecommunication charges and private health insurance in recent years.

So why do Australians – and the politicians who represent them – continue to bleat on about petrol prices when the facts really suggest that petrol prices are becoming less significant in the overall political landscape?

“For me, the volatility of petrol prices is the issue that irks most Australians about our industry”, said Mark

Australian’s simply don’t believe that fuel retailers sell fuel at (or below cost) during the low point of the fuel cycle and then recoup these losses during the top of the cycle. This, even though for many smaller retailers, that is the reality.

And so, much of the media discussion ACAPMA gets involved in is about the price discounting cycle – the mechanism that is perhaps the best indicator of an openly competitive fuel retail market.

No-one has control of the petrol cycle – it is a market dynamic – and therefore it is simply not possible to give the community certainty around petrol prices.

And so, the community will continue to be suspicious of fuel retailers, regardless of whether the national petrol price debate is premised on an increasingly insignificant household cost.

The solution – as identified in the latest ACCC Report – is for price sensitive motorists to monitor the petrol price cycle via the ACCC Website (https://www.accc.gov.au/consumers/petrol-diesel-lpg/petrol-price-cycles) and then use fuel price apps to seek out the cheapest fuel in their local area during the high points in the price cycle.

“In the meantime, our industry will continue to respond to the pendulum-like national debate about petrol prices in an environment where the price of petrol is becoming increasingly insignificant to the national economy,” said Mark.